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Commercial bank

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A commercial bank is a type of financial intermediary and a type of bank. Commercial

banking is also known as business banking. It is a bank that provides checking accounts,
savings accounts, and money market accounts and that accepts time deposits.[1] After the
implementation of the Glass-Steagall Act, the U.S. Congress required that banks engage
only in banking activities, whereas investment banks were limited to capital market
activities. As the two no longer have to be under separate ownership under U.S. law,
some use the term "commercial bank" to refer to a bank or a division of a bank primarily
dealing with deposits and loans from corporations or large businesses. In some other
jurisdictions, the strict separation of investment and commercial banking never applied.
Commercial banking may also be seen as distinct from retail banking, which involves the
provision of financial services direct to consumers. Many banks offer both commercial
and retail banking services.


• 1 Possible meanings
• 2 Origin of the word
• 3 The role of commercial banks
• 4 Types of loans granted by commercial banks
o 4.1 Secured loan
 4.1.1 Mortgage loan
o 4.2 Unsecured loan
• 5 References
• 6 Further reading

• 7 External links

[edit] Possible meanings

Commercial bank has two possible meanings:
• Commercial bank is the term used for a normal bank to distinguish it from an
investment bank or retail bank.

This is what people normally call a "bank". The term "commercial" was used to
distinguish it from an investment bank. Since the two types of banks no longer have to be
separate companies, some have used the term "commercial bank" to refer to banks that
focus mainly on companies. In some English-speaking countries outside North America,
the term "trading bank" was and is used to denote a commercial bank. During the great
depression and after the stock market crash of 1929, the U.S. Congress passed the Glass-
Steagall Act 1933-35 (Khambata 1996) requiring that commercial banks engage only in
banking activities (accepting deposits and making loans, as well as other fee based
services), whereas investment banks were limited to capital markets activities. This
separation is no longer mandatory.

It raises funds by collecting deposits from businesses and consumers via checkable
deposits, savings deposits, and time (or term) deposits. It makes loans to businesses and
consumers. It also buys corporate bonds and government bonds. Its primary liabilities are
deposits and primary assets are loans and bonds.

• Commercial banking can also refer to a bank or a division of a bank that mostly
deals with deposits and loans from corporations or large businesses, as opposed to
normal individual members of the public (retail banking).

[edit] Origin of the word

The name bank derives from the Italian word banco "desk/bench", used during the
Renaissance by Florentine bankers, who used to make their transactions above a desk
covered by a green tablecloth.[2] However, traces of banking activity can be found even in
ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire, where
moneylenders would set up their stalls in the middle of enclosed courtyards called
macella on a long bench called a bancu, from which the words banco and bank are
derived. As a moneychanger, the merchant at the bancu did not so much invest money as
merely convert the foreign currency into the only legal tender in Rome- that of the
Imperial Mint. [3]

[edit] The role of commercial banks

Commercial banks engage in the following activities:

• processing of payments by way of telegraphic transfer, EFTPOS, internet

banking, or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by overdraft, installment loan, or other means
• providing documentary and standby letter of credit, guarantees, performance
bonds, securities underwriting commitments and other forms of off balance sheet
• safekeeping of documents and other items in safe deposit boxes
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts
and similar financial products as a “financial supermarket”
• cash management and treasury services
• merchant banking and private equity financing
• traditionally, large commercial banks also underwrite bonds, and make markets in
currency, interest rates, and credit-related securities, but today large commercial
banks usually have an investment bank arm that is involved in the mentioned

[edit] Types of loans granted by commercial banks

[edit] Secured loan

A secured loan is a loan in which the borrower pledges some asset (e.g., a car or
property) as collateral (i.e., security) for the loan.

[edit] Mortgage loan

A mortgage loan is a very common type of debt instrument, used to purchase real estate.
Under this arrangement, the money is used to purchase the property. Commercial banks,
however, are given security - a lien on the title to the house - until the mortgage is paid
off in full. If the borrower defaults on the loan, the bank would have the legal right to
repossess the house and sell it, to recover sums owing to it.

In the past, commercial banks have not been greatly interested in real estate loans and
have placed only a relatively small percentage of their assets in mortgages. As their name
implies, such financial institutions secured their earning primarily from commercial and
consumer loans and left the major task of home financing to others. However, due to
changes in banking laws and policies, commercial banks are increasingly active in home

Changes in banking laws now allow commercial banks to make home mortgage loans on
a more liberal basis than ever before. In acquiring mortgages on real estate, these
institutions follow two main practices. First, some of the banks maintain active and well-
organized departments whose primary function is to compete actively for real estate
loans. In areas lacking specialized real estate financial institutions, these banks become
the source for residential and farm mortgage loans. Second, the banks acquire mortgages
by simply purchasing them from mortgage bankers or dealers.

In addition, dealer service companies, which were originally used to obtain car loans for
permanent lenders such as commercial banks, wanted to broaden their activity beyond
their local area. In recent years, however, such companies have concentrated on acquiring
mobile home loans in volume for both commercial banks and savings and loan
associations. Service companies obtain these loans from retail dealers, usually on a
nonrecourse basis. Almost all bank/service company agreements contain a credit
insurance policy that protects the lender if the consumer defaults. Bold text

[edit] Unsecured loan

Unsecured loans are monetary loans that are not secured against the borrowers assets
(i.e., no collateral is involved). These may be available from financial institutions under
many different guises or marketing packages:

• bank overdrafts
• corporate bonds
• credit card debt
• credit facilities or lines of credit
• personal loans

[edit] References
1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: k. Upper Saddle River,
New Jersey 07458: Pearson Prentice Hall. pp. 511. ISBN 0-13-063085-3.
2. ^ de Albuquerque, Martim (1855). Notes and Queries. London: George Bell.
pp. 431. http://books.google.com/?
3. ^ Matyszak, Philip (2007). Ancient Rome on Five Denarii a Day. New York:
Thames & Hudson. pp. 144. ISBN 050005147X.

This report brings the end of the Practical training programme which took 8 weeks (eight
weeks according to the IFM Prosectus 2009/2010, and extended period of two weeks as
needed by Azania Bank ). The training took place between 19th July and10th Sept. 2010..

The practical training was re-introduced due to its advantages to the students, University
and partner institution. To the students, practical training helps them to integrate theory
and practice so as to obtain valuable experience in a real life situation. It is believed the
students will be able to enhance their skills, knowledge, work abilities, attitude towards
their areas of specialization and managerial skills. To the University, practical training
increases closer links with potential employers, and initiates opportunities of research and
consultancy with employers. Also, employers may be invited to provide input into the
course as guest lecturers. To the partner institution, new ideas may be received, better
analytical and problem solving skills as well as getting prospective manpower.
The report has four schemes. The first scheme carries general information about Azania
Bank Tanzania which is the firm providing Audit, Tax, Management consultancy, and
Financial advisory services. The second scheme covers the information on activities
performed during the practical training period, while the third and fourth chapters provide
the conclusion and recommendations respectively. The recommendations arise from my
own experince as well as of my fellow trainees from various institutions where they went
for practical training.

[edit] Further reading

• Brunner, Allan D.; Decressin, Jörg; Hardy, Daniel C. L.; Kudela, Beata (2004-06-
21). Germany's Three-Pillar Banking System: Cross-Country Perspectives in
Europe. International Monetary Fund. ISBN 1-58906-348-1. ISSN 0251-6365.
• Khambata, Dara (1996). The practice of multinational banking: macro-policy
issues and key international concepts (2nd ed.). New York: Quorum Books.
pp. 320. ISBN 978-0899309712.

[edit] External links

• Tiwari, Rajnish und Buse, Stephan (2006): The German Banking Sector:
Competition, Consolidation and Contentment, Hamburg University of
Technology (TU Hamburg-Harburg)

Retrieved from "http://en.wikipedia.org/wiki/Commercial_bank"

Categories: Banks
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Functions of Commercial Banks
33.1 Introduction
You have studied in the earlier lesson about different types of
and their nature. It may be of interest to you now to know about
various services/functions performed by commercial banks. In
this lesson,
you will study about the various services provided by commercial
to the business community in particular and the public in general.
33.2 Objectives
After studying this lesson, you will be able to -
l describe the various functions of commercial banks;
l differentiate between primary and secondary functions of
commercial banks;
l classify and discuss the primary functions of modern commercial
l enumerate the various modes of acceptance of deposits;
l identify various methods of granting loans;
l describe agency and general utility services of modern
22 :: Business Studies
33.3 Functions of Commercial Banks
The functions of a commercial banks are divided into two
i) Primary functions, and
ii) Secondary functions including agency functions.
i) Primary functions:
The primary functions of a commercial bank include:
a) accepting deposits; and
b) granting loans and advances;
a) Accepting deposits
The most important activity of a commercial bank is to mobilise
deposits from the public. People who have surplus income and
savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with
bank also earn interest. Thus, deposits with the bank grow along
with the interest earned. If the rate of interest is higher, public
are motivated to deposit more funds with the bank. There is also
safety of funds deposited with the bank.
b) Grant of loans and advances
The second important function of a commercial bank is to grant
loans and advances. Such loans and advances are given to
members of the public and to the business community at a higher
rate of interest than allowed by banks on various deposit
The rate of interest charged on loans and advances varies
depending upon the purpose, period and the mode of repayment.
The difference between the rate of interest allowed on deposits
and the rate charged on the Loans is the main source of a bank’s
i) Loans
A loan is granted for a specific time period. Generally,
commercial banks grant short-term loans. But term loans,
Functions of Commercial Banks :: 23
that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lumpsum
or in instalments. However, interest is charged on the full
amount of loan. Loans are generally granted against the
security of certain assets. A loan may be repaid either in
lumpsum or in instalments.
ii) Advances
An advance is a credit facility provided by the bank to its
customers. It differs from loan in the sense that loans may
be granted for longer period, but advances are normally
granted for a short period of time. Further the purpose of
granting advances is to meet the day to day requirements
of business. The rate of interest charged on advances varies
from bank to bank. Interest is charged only on the amount
withdrawn and not on the sanctioned amount.
Modes of short-term financial assistance
Banks grant short-term financial assistance by way of cash credit,
overdraft and bill discounting.
a) Cash Credit
Cash credit is an arrangement whereby the bank allows the
borrower to draw amounts upto a specified limit. The amount is
credited to the account of the customer. The customer can
withdraw this amount as and when he requires. Interest is
on the amount actually withdrawn. Cash Credit is granted as per
agreed terms and conditions with the customers.
b) Overdraft
Overdraft is also a credit facility granted by bank. A customer
who has a current account with the bank is allowed to withdraw
more than the amount of credit balance in his account. It is a
temporary arrangement. Overdraft facility with a specified limit
is allowed either on the security of assets, or on personal
or both.
24 :: Business Studies
c) Discounting of Bills
Banks provide short-term finance by discounting bills, that is,
making payment of the amount before the due date of the bills
after deducting a certain rate of discount. The party gets the
funds without waiting for the date of maturity of the bills. In
case any bill is dishonoured on the due date, the bank can
the amount from the customer.
ii) Secondary functions
Besides the primary functions of accepting deposits and lending
banks perform a number of other functions which are called
functions. These are as follows -
a) Issuing letters of credit, travellers cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents,
securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one
branch to another branch of the bank.
e) Standing guarantee on behalf of its customers, for making
payments for purchase of goods, machinery, vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of customers.
33.4 Difference between Primary and
Functions of Commercial Banks
Primary Functions Secondary Functions
1. These are the main activities 1. These are the secondary
of the bank. activities of the bank.
2. These are the main sources These are not the main souof
income of the bank. rces of income of the banks.
Functions of Commercial Banks :: 25
3. These are obligatory on the These are not obligatory on
part of bank to perform. the part of bank to perform.
But generally all commercial
banks perform these
Intext Questions 33.1
Write ‘T’ against the statements which are true, and ‘F’ against
which are false.
a) A country cannot make commercial and industrial progress
without a well organised banking system.
b) Loans may be granted only for long period by bank.
c) Primary activity of commercial banks includes accepting
and lending money.
d) Difference of interest allowed to public on deposits and
on loan is the main source of income of banks.
e) In case of dishonour of a bill, which was discounted by a bank,
the amount cannot be recovered from the customer.
f) A loan cannot be repaid in lumpsum by the borrower.
g) Primary functions of banks refer to basic activities of banks.
h) Overdraft is not a credit facility granted by bank.
i) Loans are generally granted against the security of certain
33.5 Different modes of Acceptance of
Banks receive money from the public by way of deposits. The
types of deposits are usually received by banks:
i) Current deposit
ii) Saving deposit
iii) Fixed deposit
26 :: Business Studies
iv) Recurring deposit
v) Miscellaneous deposits
i) Current Deposit
Also called ‘demand deposit’, current deposit can be withdrawn
by the
depositor at any time by cheques. Businessmen generally open
accounts with banks. Current accounts do not carry any interest
as the
amount deposited in these accounts is repayable on demand
any restriction.
The Reserve bank of India prohibits payment of interest on
accounts or on deposits upto 14 Days or less except where prior
has been obtained. Banks usually charge a small amount known
incidental charges on current deposit accounts depending on the
of transaction.
Savings deposit/Savings Bank Accounts
Savings deposit account is meant for individuals who wish to
small amounts out of their current income. It helps in safe
their future and also earning interest on the savings. A saving
can be opened with or without cheque book facility. There are
restrictions on the withdrawls from this account. Savings account
are also allowed to deposit cheques, drafts, dividend warrants,
drawn in their favour for collection by the bank. To open a
account, it is necessary for the depositor to be introduced by a
having a current or savings account with the same bank.
Fixed deposit
The term ‘Fixed deposit’ means deposit repayable after the
expiry of
a specified period. Since it is repayable only after a fixed period
time, which is to be determined at the time of opening of the
it is also known as time deposit. Fixed deposits are most useful
for a
commercial bank. Since they are repayable only after a fixed
the bank may invest these funds more profitably by lending at
rates of interest and for relatively longer periods. The rate of
on fixed deposits depends upon the period of deposits. The
longer the
period, the higher is the rate of interest offered. The rate of
interest to
Functions of Commercial Banks :: 27
be allowed on fixed deposits is governed by rules laid down by
Reserve Bank of India.
Recurring Deposits
Recurring Deposits are gaining wide popularity these days. Under
type of deposit, the depositor is required to deposit a fixed
amount of
money every month for a specific period of time. Each instalment
vary from Rs.5/- to Rs.500/- or more per month and the period of
account may vary from 12 months to 10 years. After the
completion of
the specified period, the customer gets back all his deposits
the cumulative interest accrued on the deposits.
Miscellaneous Deposits
Banks have introduced several deposit schemes to attract
deposits from
different types of people, like Home Construction deposit
Sickness Benefit deposit scheme, Children Gift plan, Old age
scheme, Mini deposit scheme, etc.
33.6 Different methods of Granting Loans by
The basic function of a commercial bank is to make loans and
out of the money which is received from the public by way of
The loans are particularly granted to businessmen and members
of the
public against personal security, gold and silver and other
movable and
immovable assets. Commercial bank generally lend money in the
following form:
i) Cash credit
ii) Loans
iii) Bank overdraft, and
iv) Discounting of Bills
i) Cash Credit :
A cash credit is an arrangement whereby the bank agrees to lend
to the borrower upto a certain limit. The bank puts this amount of
money to the credit of the borrower. The borrower draws the
28 :: Business Studies
as and when he needs. Interest is charged only on the amount
drawn and not on the amount placed to the credit of borrower’s
Cash credit is generally granted on a bond of credit or certain
securities. This a very popular method of lending in our country.
ii) Loans :
A specified amount sanctioned by a bank to the customer is
called a
‘loan’. It is granted for a fixed period, say six months, or a year.
specified amount is put on the credit of the borrower’s account.
He can
withdraw this amount in lump sum or can draw cheques against
sum for any amount. Interest is charged on the full amount even
if the
borrower does not utilise it. The rate of interest is lower on loans
comparison to cash credit. A loan is generally granted against the
security of property or personal security. The loan may be repaid
lump sum or in instalments. Every bank has its own procedure of
granting loans. Hence a bank is at liberty to grant loan depending
its own resources.
The loan can be granted as:
a) Demand loan, or
b) Term loan
a) Demand loan
Demand loan is repayable on demand. In other words it is
repayable at short notice. The entire amount of demand loan is
disbursed at one time and the borrower has to pay interest on it.
The borrower can repay the loan either in lumpsum (one time)
or as agreed with the bank. Loans are normally granted by the
bank against tangible securities including securities like N.S.C.,
Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates.
b) Term loans
Medium and long term loans are called ‘Term loans’. Term loans
are granted for more than one year and repayment of such loans
is spread over a longer period. The repayment is generally made
in suitable instalments of fixed amount. These loans are
over a period of 5 years and maximum upto 15 years.
Functions of Commercial Banks :: 29
Term loan is required for the purpose of setting up of new
business activity, renovation, modernisation,
of existing units, purchase of plant and machinery, vehicles, land
for setting up a factory, construction of factory building or
purchase of other immovable assets. These loans are generally
secured against the mortgage of land, plant and machinery,
building and other securities. The normal rate of interest charged
for such loans is generally quite high.
iii) Bank Overdraft
Overdraft facility is more or less similar to cash credit facility.
facility is the result of an agreement with the bank by which a
account holder is allowed to withdraw a specified amount over
above the credit balance in his/her account. It is a short term
This facility is made available to current account holders who
their account through cheques. The customer is permitted to
the amount as and when he/she needs it and to repay it through
in his account as and when it is convenient to him/her.
Overdraft facility is generally granted by bank on the basis of a
request by the customer. Some times, banks also insist on either
promissory note from the borrower or personal security to ensure
of funds. Interest is charged on actual amount withdrawn by the
customer. The interest rate on overdraft is higher than that of the
on loan.
iv) Discounting of Bills
Apart from granting cash credit, loans and overdraft, banks also
financial assistance to customers by discounting bills of
exchange. Banks
purchase the bills at face value minus interest at current rate of
for the period of the bill. This is known as ‘discounting of bills’.
of exchange are negotiable instruments and enable the debtors
discharge their obligations towards their creditors. Such bills of
arise out of commercial transactions both in internal trade and
trade. By discounting these bills before they are due for a
amount, the banks help the business community. Of course, the
recover the full amount of these bills from the persons liable to
30 :: Business Studies
Intext Questions 33.2
Fill in the blanks with suitable words
(a) There are four important ways of lending money by banks.
are :
(b) Bank loans can be divided into two categories viz _______ and
(c) When the loan is repayable on demand or at a very short
the loan is known as __________.
(d) If the loan granted by a bank is on long-term or medium-term,
the loan is called _________.
(e) ____________ is a flexible system of lending under which the
borrower has the option to withdraw the funds as and when
(f) _____________ is an agreement with the bank by which a
account holder is allowed to withdraw over and above the
in his account.
(g) In discounting the bills the banks ________ bills of exchange
before they become due for payment.
(h) Due date of bill is also known as date of _________________.
33.7 Agency and General Utility Services
provided by
Modern Commercial Banks
You have already learnt that the primary activities of commercial
include acceptance of deposits from the public and lending
money to
Functions of Commercial Banks :: 31
businessmen and other members of society. Besides these two
activities, commercial banks also render a number of ancillary
These services supplement the main activities of the banks. They
essentially non-banking in nature and broadly fall under two
i) Agency services, and
ii) General utility services.
i) Agency Services
Agency services are those services which are rendered by
banks as agents of their customers. They include :
a) Collection and payment of cheques and bills on behalf of the
b) Collection of dividends, interest and rent, etc. on behalf of
customers, if so instructed by them;
c) Purchase and sale of shares and securities on behalf of
d) Payment of rent, interest, insurance premium, subscriptions
on behalf of customers, if so instructed;
e) Acting as a trustee or executor;
f) Acting as agents or correspondents on behalf of customers for
other banks and financial institutions at home and abroad.
ii) General utility services
General utility services are those services which are rendered by
commercial banks not only to the customers but also to the
public. These are available to the public on payment of a fee or
They include :
a) Issuing letters of credit and travellers’ cheques;
b) Underwriting of shares, debentures, etc.;
c) Safe-keeping of valuables in safe deposit locker;
d) Underwriting loans floated by government and public bodies.
32 :: Business Studies
e) Supplying trade information and statistical data useful to
f) Acting as a referee regarding the financial status of customers;
g) Undertaking foreign exchange business.
Intext Questions 33.3
Write “T” against the statements which are true and “F” against
which are false.
(i) Accepting deposits is an essential function of a modern
commercial bank.
(ii) Granting loan to the borrowers is not the main function of a
(iii) Ancillary services are also known as supplementary functions
a commercial bank.
(iv) General utility services are called non-banking services.
(v) Services rendered by banks to the general public constitute
main function of banks.
(vi) Bank charges some amount for the services rendered.
(vii) Bank cannot buy and sell shares and debentures on behalf of
(viii) Bank stands guarantee against loan raised by its customers
other financial institutions.
ix) Safe deposit vaults are made available by bank only to fixed
deposit account holders.
(x) Banks generally grant long-term loans to industries.
33.8 What You Have Learnt
In this lesson you have studied various services/functions
performed by
commercial banks. Commercial banks render services to the
community, as well as to the general public.
Functions of Commercial Banks :: 33
The functions of banks are divided into two categories : (i)
functions, (ii) Secondary functions. Primary functions include
deposits and lending money. Loans given by banks are : Short-
loan and long-term loans. Banks grant short-term loan to its
by way of cash credit, overdraft, discounting of bills.
Banks accepts deposits from the public and their customers in
the form
of Current deposit, Saving, deposit, fixed deposit, and under
deposit schemes. Banks grant loans to customers as demand
loan and
term loan.
The ancilliary services of banks are agency services and general
services. Agency services are rendered as agent of customers,
general utility services are rendered to the general public.
33.9 Terminal Exercise
1. Explain the Primary functions of banks.
2. Explain the Secondary functions of banks.
3. Describe the functions of modern commercial banks.
4. Explain the methods of granting loan by bank.
5. What do you mean by bank overdraft? Explain the procedure
granting overdraft by bank.
6. Differenciate between loans and advances.
7. Explain cash credit facility allowed by banks to customers.
8. What do you mean by discounting of bills by bank?
9. Explain in brief the agency functions of a commercial bank.
10. Differenciate between Primary and Secondary functions
by bank.
11. Describe briefly the various modes of acceptance of deposits
34 :: Business Studies
33.10 Answers to Intext Questions
33.1 True a) c) d) g) i)
False b) e) f) h)
33.2 a) i) loans
ii) Cash credit
iii) Overdraft
iv) Discounting of bills
b) Short-term, Long-term
c) Short-term
d) Term loan
e) Cash credit
f) Overdraft
g) Discount
h) Maturity
33.3 True i) iii) iv) vi) viii)

• False ii) v) vii) ix) x)